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Article Insects, us & the future

The debt generation

On July 20th, The Guardian reported that Business Secretary Vince Cable had called off the sale of student loans to the private sector. The £12bn worth of loans, made between 1998 and 2011, was supposed to form part of the government’s privatisation programme and pave the way for further sales.

How long the sell-off remains off the table is yet to be seen – Cable acted without negotiating with his coalition partners and may have simply postponed the sale until after next year’s election. The Liberal Democrats are unlikely to be part of the next government and the Conservatives seem set on the policy, as do Labour. The change in primary legislation enabling the loan stock privatisation was made already under Labour in 2008, with the Sale of Student Loans Act.

Even without the sell-off, the new student loan system is heavily flawed.

If Mr Cable’s U-turn is a pause rather than a halt on the privatisation plans, it is worth understanding what is behind the sell-off to ensure that it does not simply go ahead with less fuss after the elections. The sale of the loan book is just the final straw that could break graduates’ backs under the debt burden. Even without it, the reforms to the loan system are heavily flawed.

The first sales

Last November, the first step in the latest student loan privatisation was taken with the sale of the remaining ‘mortgage-style’ loans from before 1998. The £890 million pot was sold to the consortium Erudio Student Loans for £160 million. Many critics of austerity keenly disapproved of the sale as wasting government’s money, but not repaid 15 years after they were made, these 250,000 loans were more likely to be unrecoverable for the Student Loans Company (SLC).

Unsurprisingly, this is also reflected in who formed the consortium: Arrow Global, a specialist debt recovery firm who according to the Independent “is providing the expertise to manage the collection of these outstanding student debts”, and CarVal Investors, a private equity firm that in the UK focuses on buying distressed assets.

The nature of the debt recovery business is buying assets whose recovering others have given up on, and using any available tactics to get the debtors to pay.

Using heavier tactics than the SLC is what Erudio has done: graduates say Erudio has threatened to give their details to credit reference agencies if they deferred their loans. This means deferring would increase the cost of other credit. Also, the company has been asking far more detailed information about debtors’ employers than the SLC, and applications for deferrals are taking longer than necessary.

Problems with the sell-off

The next sale of loans was set to be those given out between 1998 and 2011: between the introduction of tuition fees and the 2012 reforms that marked the biggest shake-up in the UK higher education system ever.

The government commissioned Rothschild to look into the privatisation of the loan book. The report the investment bank wrote was leaked to the Guardian in summer 2013.

The terms and conditions of student loans clearly state the possibility for future changes.

At the moment, student loans come with favourable conditions. Graduates only need to repay their loans when they earn over a threshold that increases in line with inflation and was £16,365 in April 2013 – hence the name Income Contingent Repayment (ICR). For those who took student loans before 2012, the interest rate is either in line with inflation (RPI) or Bank of England base rate +1%, whichever is lower.

The terms and conditions of student loans clearly state the possibility for future changes: “The conditions for repaying Income Contingent Loans are included in the following regulations (which may be replaced by later regulations).”

Rothschild proposed to remove the cap on interest rates to make the loans more lucrative to the private sector, but there was uproar from NUS and student campaigners such as the Students’ Assembly Against Austerity and last autumn, the then universities minister David Willetts promised NUS interest rates would not be retrospectively increased.

This was the first problem the government faced: it was questionable how lucrative of an asset such a heavily subsidised loan stock would be for private investors.

Solution: “synthetic hedge”

Raising the interest rates or other changes in the repayment terms were not the only thing the government could do to make student loans more appealing to the private sector: the other option on the table was to create a so-called “synthetic hedge”.

This taxpayer-funded policy would have guaranteed to compensate the buyer of the loan stock against future losses due to the favourable loan terms.

The bank bail-outs made visible what has been one of the key principles of the marriage between unregulated finance and the neoliberal state: that the government would always keep the financial sector afloat, however heavy the cost for the rest of the society. What the “synthetic hedge” would have done is to take this relationship one step further; to predetermine the bail-out guarantee, to normalise the unholy relationship.

It also shows the ideological nature of the government’s privatisation frenzy: selling future profits without the accompanying risk would have at best been an accounting trick to reduce levels of public debt on paper. As The Guardian’s Aditya Chakrabortty writes, the problem that led to the U-turn on the sell-off was that it did was not a sale in statistician’s eyes.

Whether there is a way where there is a will remains to be seen, most probably under the next government. The rising volume of loans makes their privatisation lucrative for the free market-minded.

The rising volume of loans…

If the prepared sale was merely to pave way for the sale of loans given out after the 2012 reforms, as the higher education analyst Andrew McGettigan suggests, no wonder: on average current students will graduate with 78% more debt than those who started before 2012.

The Higher Education White Paper from 2011 clearly states: “We have been assessing how best to manage the government’s holding of current and future ICR loans, including the potential to realise value for the taxpayer from a sale of this growing portfolio.” (my emphasis)

The average debt at graduation for current students is £44,000.

The volume of student loans has been rising at a staggering speed since the introduction of the up to £9,000 fees. The value of student loans is predicted to double from £35m in 2010-11 to nearly £70m in 2017-18.

…graduates pay back longer

The decision to treble undergraduate fees triggered riots in 2010, but the following White Paper outlined other as important reforms that have escaped attention. The average debt at graduation nearly doubled to £44,000 as result of the reforms, estimates the IFS, and the loan system for those who entered higher education after 2012 looks very different.

The repayment threshold was raised to £21,000. Because graduates pay back 9% of their earnings that exceed the threshold, this means that graduates pay back less per month under the new system than under the old system. A progressive element in the reforms, this has shifted the burden of payment towards higher earners.

But interest rates have changed, too: the low-interest cap that applies for pre-2012 loans has been removed, and instead the interest varies with income up to RPI+3%: this means that for the first time, there is a positive real interest rate for student loans. This of course increases the size of student loans, and graduates under the new system pay back much longer than under the old system – not least because the loans are written off after 30 years instead of 25 years.

According to a study by the IFS published in April, this increases the total average graduate repayment to £66,897. Due to the higher threshold, graduates will pay less in their 20s but more in their 30s and 40s; only 5% will have paid their student loan completely by their 40s, compared to nearly half under the old system.

“For many professionals, such as teachers, this will mean having to find £1,700-£2,500 a year more to service loans at a time when their children are still at school, and family and mortgage costs are at their most pressing”, writes David Hall from Sutton Trust in the foreword of the IFS study titled ‘Payback time? Student debt and loan repayments: what will the 2012 reforms mean for graduates?’

Although student debt does currently not impact an individual’s credit score and will not have a direct effect on graduates’ ability to get a mortgage, the new regulations on mortgage lending obligate lenders to scrutinise borrowers’ income and outgoings much more closely. The increasing size of student loans could also make it more difficult for graduates to save for a mortgage.

The economic recovery celebrated by the government hardly extends to graduates: a quarter of under-25s are currently unemployed, and many graduates struggle in a vicious cycle of unpaid internships and zero-hour jobs they are overqualified for.

If this generation is still paying debts from their degrees in their 40s, the trajectory for economic recovery hardly gets better. Debt repayments in that situation are taken from income that could otherwise be spent on consumption – and, if the sell-off was to go ahead, what could be paid in taxes will flow into private pockets.

Debt economy heading to a new crisis?

The problem with trying to estimate the impact of the reforms is that future is inherently uncertain. Our economy is currently built on increasing levels of private debt; this results largely from an ideological attempt to avoid public indebtedness that has been one of the driving forces of economic policy-making in the neoliberal era, since 1970s.

Our economy is currently built on increasing levels of private debt, reflecting an ideological attempt to avoid public indebtedness

The 2012 higher education reforms are a prime example of that ideology: the increase in graduates’ debt burden has not happened out of nowhere, but results directly from the withdrawal of public funding from most university courses.

Especially arts and humanities feel the squeeze, and the number of applications for modern languages fell by a quarter this year. Whether this reflects the increased commodification of education the fee hike has brought about is unknown, but the White Paper speaks a language of employability and strengthening the links between universities rather than appreciating knowledge and critical thinking.

Concerns such as a recent report from a group of MPs that the student loan is “financially unworkable” highlight the ideological nature of the reforms.

Currently it is estimated that 45% of what is lent out as student loans will not be recovered – the cut-off point for the new system costing more than the one it replaced is 48.6%.

IFS estimates that under the new system, 60% of graduates will not pay back all of their student debt – compared to 15% under the previous system. Student loans might be approaching a point where increasing levels of debt undermine stability in a similar vein as housing debt in the US in the run-up to the crisis.

If that debt was privatised, one of the proposals by the Rothschild report Andrew McGettigan highlights is ‘tranching’: breaking the loan book into smaller units instead of treating it in the form of entire yearly cohorts.

Loans could be tranched according to seniority or underlying characteristics of the borrowers: this would enable different returns for student loans from different universities, according to different disciplines or even the gender of the borrower. As it might be difficult to find buyers for some of the tranches, they would be likely to be securitised into some form of collateralised debt obligations, the kind of financial engineering that is best known for obscuring financial risks.

The government’s approach reflects an understanding of debt as a technicality but it is more than that.

Students at the heart of the system

When the government trebled tuition fees, they were keen to point out that it would not deter any student access to higher education, as no one would need to pay tuition upfront and repayments would only need to be made once the graduates earned enough. This is of course technically true: it also reflects economists’ understanding of debt as a mere technicality.

Debt is, however, much more than that. Ask a Greek, or a Bolivian or Malagasy for that matter, whose country has been disciplined to slash public spending in the form of structural adjustment, with growth not resuming but inequality and poverty soaring.

Putting a generation tens of thousands of pounds in debt is limiting their choices both before and after graduation, even if that pressure was not direct. That debt must be repaid is so deeply rooted in most of us that it is very difficult to act as though it did not exist.

This disciplinary aspect of debt gives a much more sinister tone to the 2011 White Paper’s title ‘Students at the Heart of the System’. It indeed chains graduates into the core of a system that is heading into even deeper crises both economically and socially. Instead, a sustainable higher education policy would encourage young people to seek ways out of it.

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